Is the "Drop Gold" advertisement coming true? Outflows from gold ETFs, while Grayscale Bitcoin Trust sees a surge in demand

As of now, Grayscale's Bitcoin Trust Fund has seen inflows in the fourth quarter triple that of the third quarter, while gold ETFs have experienced net outflows since mid-October. Analysts at JPMorgan Chase suggest that this contrast indicates that some investors who previously allocated funds to gold ETFs may be shifting their investments to Bitcoin as a substitute for gold.

Drop Gold

Cryptocurrency asset management company Grayscale's ad slogan "Drop Gold," conceived in May last year, sparked much discussion. However, many at the time believed that Bitcoin replacing gold was far-fetched.

Nevertheless, a year later, investors' views on Bitcoin seem to be aligning with the company's expectations. Grayscale's Managing Director Michael Sonnenshein stated that in 2020, Grayscale saw the most capital inflows ever in its business. During an interview, he mentioned:

"In 2019, we set our previous record, and that momentum carried through to 2020. In the third quarter, over $1 billion flowed into Grayscale."

At the same time, analysts at JPMorgan claimed in a report released on Friday that the inflow of funds into Grayscale sharply contrasts with the gold market. The analysts wrote in the report:

"Over the past five weeks, the most impressive aspect of the flow into the Grayscale Bitcoin Trust is the stark contrast it presents with flows into gold ETFs, which have seen modest outflows since mid-October."

The analysts added that this contrast suggests that some investors previously in gold ETFs, such as family offices, may be considering Bitcoin as an alternative to gold.

Concerns for Gold's Future

Sonnenshein is not surprised by this trend, as everything seems to be moving entirely in the direction Grayscale is betting on, where money will be replaced by Bitcoin due to changing preferences. Sonnenshein stated:

"Looking back at the 'Drop Gold' ad from last year, we see the investment preferences of a new generation. What we are witnessing now is the beginning of this wealth transfer."

Indeed, since August this year, the price of gold has been declining, echoing the recent outflows from gold ETFs. Since hitting a yearly high in August, the price of gold per ounce has dropped by about 10%.

Analysts at Australia's largest banking group, Macquarie Bank, anticipate a bleaker outlook for gold. The analysts, in an interview with the Financial Times, stated that with positive vaccine developments indicating global economic recovery, gold as a risk hedge tool will reach its peak. The analysts predict that the price of gold will fall to $1,550 per ounce next year, representing a potential 17% decline from current prices.

Institutional Market Influence Grows

Furthermore, JPMorgan analysts found that in the third quarter, retail customers using Square's Cash App bought over $1.6 billion worth of Bitcoin, more than three times the inflows into Grayscale's Bitcoin Trust fund during the same period. However, in the fourth quarter, the inflow of funds into Grayscale's Bitcoin Trust fund tripled compared to the third quarter, indicating a significant increase in institutional investors' willingness to invest in Bitcoin and view it as a long-term investment tool.

Additionally, JPMorgan speculates that Bitcoin has been consistently at high levels in recent weeks, failing to recover to average prices. This suggests that the role of momentum traders like Commodity Trading Advisors (CTAs) in the market is diminishing relative to institutions.